Court won't void 'defective' mortgage

In the case Miller v. LaSalle Bank National Association, homeowner Linda Miller took out a mortgage for $49,300 in 2001 and executed a deed of trust securing the mortgage with her home. Lender LaSalle (via its predecessor, Alliance) recorded the trust deed at the Miami County Recorder's office in Indiana.

However, the mortgage document recorded was defective; it did not identify the individuals who had executed it before the notary.

In 2008, the borrowers filed a petition for relief under Chapter 13 of the Bankruptcy Code, and the bankruptcy trustee initiated a proceeding to avoid the mortgage under Indiana's recording statute, Section 32-21-4-1 of the Indiana Code.

At the time the mortgage was recorded, Indiana Code Section 32-21-4-1 provided that an improperly recorded, technically defective mortgage like the one at issue in this case was avoidable (void or invalid), because it failed to give constructive notice of the mortgage's existence to subsequent bona fide purchasers (BFPs).

In 2007, though, the recording statute was amended to allow that some technical defects -- including the defect in the LaSalle mortgage's acknowledgment -- would not invalidate the recording of a mortgage.

The bankruptcy court ruled that the trustee could avoid the mortgage because the 2007 amendment to the recording statute, while ambiguous, most likely did not apply retroactively to the mortgage, which was recorded in 2001.

On appeal, the district court disagreed with the bankruptcy court's interpretation of the amendment. In examining indicia of legislative intent, the district court noted that the recording statute was again amended in 2008 by the legislature, which clarified that the amendment was intended to divest bankruptcy trustees of the ability to avoid improperly recorded mortgages, whether they were recorded before or after the 2007 amendment.

The 7th Circuit Court of Appeals affirmed the district court's ruling. In response to the parties' dispute over whether the recording statute amendment could be applied to properties purchased (or property interests acquired by the bankruptcy trustee) between the 2007 and 2008 amendments, the Court of Appeals looked to basic principles of statutory interpretation.

An analysis of the plain language of the statute does leave reasonable ambiguity as to whether the 2007 amendment applies to these debtors' mortgage.

Moving forward with its analysis, the Court of Appeals explained that, in Indiana, "absent 'strong and compelling' reasons, statutes will not be interpreted to apply retroactively," concluding that the statute should not be given retroactive effect.

However, while the trustee argued that retroactivity would involve applying the 2007 amendment to the 2001 recording of the mortgage, LaSalle argued that the relevant event was not the recording but the attachment of the BFP's rights -- the trustee's attachment of rights in 2008 by virtue of the bankruptcy filing.

Because the trustee's rights in the property did not give rise until after the 2007 amendment, the Court of Appeals determined, it would not be a retroactive application for the mortgage acknowledgment's defects to fall under the 2007 amendment.

Accordingly, the court ruled, the mortgage was not avoidable by the trustee, and the district court's ruling was affirmed.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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